A baby boomer couple whose home is worth millions doesn't need to sell. They can retire in the backyard.

Table of Contents

• Sue and Ken Allen's house in Palo Alto, purchased for $63,000 in 1975, is probably worth between $3-4 million.
• The threat of paying capital gains taxes and higher property taxes deters them from selling.
• They're planning to downsize into a tiny home that's attached to their property and rent out the main house.

Sue Allen and her husband, Ken, relocated to Palo Alto in the 1970s, at a time when the South Bay area was just starting to be referred to as the Silicon Valley.

Allen, 75, and her husband, 77, purchased their South Palo Alto home for roughly $63,000 back in 1975. Nowadays, the property is likely worth nearly four million dollars, considering it's located near Stanford University and close to the headquarters of many top tech companies worldwide.

The house is spacious - in the mid-1980s, the couple added a second floor to the home to make room for four extra bedrooms and two bathrooms as their family expanded.

Around the early 2000s, they renovated the single-story house in their backyard – often referred to as an accessory dwelling unit – adding rooms for a bedroom, kitchen, and bathroom, which has been rented out ever since.

The Allens are not planning to sell their house, even though it's bigger than what they need. This is because they have a plan to move into their backyard cottage someday, then rent out the main house.

Many homeowners, like the Allens, are turning to an Accessory Dwelling Unit (ADU) for their older age. Backyard tiny homes, basements, or attic units are becoming common ways for homeowners to add living space, increase their property value, generate rental income, and even create a place to age in place. California is one of 14 states that allow ADUs and more than 60,000 have been permitted there since 2016.

The High Cost of Selling.

In addition to having a smaller home to downsize to in their own backyard, it really doesn't make financial sense for the Allens to sell their property and purchase a smaller house for retirement.

High-income individuals and couples who earn more than $500,000 per year or individuals who earn more than $250,000 per year would likely face significant additional expenses, including larger mortgage interest on new homes and substantial increases in property taxes.

This keeps property taxes at only one percent of what the home originally cost and also limits how much they can increase to no more than two percent every year until the house is sold again.

As the value of homes increases, so does the cost of property taxes that homeowners would have to pay on a newly purchased home, making it even more unaffordable.

We're living in this $4 million house, and we don't consider downsizing because it wouldn't make sense financially," Allen said. "We'd have to pay a significant amount in taxes.

She notes she profited from and contributed to "generational wealth" through homeownership. She was able to come up with her own $12,500 downpayment only with her mother's assistance. In turn, she assisted her five adult children with their down payments. However, her children have all left California for other states like Texas, Idaho, Utah and Nevada, where housing is more affordable.

According to Zillow, the Allens' property is estimated to be worth around $3.1 million, while Redfin puts it at almost $3.5 million. Allen believes it could be sold for closer to $4 million, given the prices paid for similar homes in her neighborhood in recent months. Just recently, a much smaller house located on the same street as the Allens' property sold for $3.6 million in August.

"People spend upwards of $3 to $4 million for a house, demolish it, and then construct a large new home on the same property," she said.

Allen still works part-time as a tech support specialist for the East Palo Alto school district, while her husband, a former patent attorney, has fully retired.

If Allen's husband, who has Parkinson's disease, develops dementia at some point, she's planning to move with him into an assisted living facility in Utah, where their two kids live. This location also offers long-term care at a lower cost than what is available in California.

Our support network, as well as our friends here — we have a very strong church community here," Allen said. "We really want to remain here.

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